Millions of retirees rely on Social Security benefits to cover their daily living expenses, and each year, Cost-of-Living Adjustments (COLAs) help ensure their benefits keep pace with inflation.
However, if these adjustments are insufficient, retirees could face a decline in their purchasing power, which means effectively receiving less money.
A recent increase in the 2026 COLA forecast has raised both hope and concern for those depending on these benefits.
2026 COLA Forecast Revision: What Does It Mean for Retirees?
The Senior Citizens League, an advocacy group for seniors, recently updated its forecast for the 2026 COLA to 2.3%, a slight increase from the previous estimate of 2.2%. This revision came despite the March inflation reading being the lowest it had been since September.
While this adjustment may appear to offer some relief, it’s important to examine the broader picture of inflation trends and how they affect retirees.
How COLA is Calculated: The Flaw in the System
The COLA adjustment is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks inflation based on the spending habits of working adults.
The calculation involves comparing the average CPI-W reading for the third quarter of the current year with the same period from the previous year. Any increase in the CPI-W results in a corresponding increase in Social Security benefits.
However, the CPI-W has its limitations. This index reflects the spending patterns of a workforce that is generally younger than retirees, and it may not accurately capture the specific spending needs of seniors.
Retired individuals typically allocate more of their budgets to housing and medical care while spending less on transportation compared to the general workforce.
As a result, the CPI-W tends to place too much weight on transportation costs, which are less significant for seniors, and not enough on areas like healthcare and housing, which are key expenses for retirees.
Why Social Security Benefits May Lose Purchasing Power in 2026
Despite the upward revision in the COLA forecast, inflation trends in the first quarter of 2025 are signaling a potential issue for Social Security beneficiaries.
CPI-W inflation slowed to 2.2% in March 2025, but prices in areas of key concern for retirees, such as housing and medical care, were rising faster than the overall CPI-W index.
Inflation Trends in Early 2025
| Category | Inflation Rate (Q1 2025) |
|---|---|
| CPI-W (All Categories) | 2.6% |
| Housing | 3.7% |
| Medical Care | 2.8% |
| Transportation | 1.4% |
As shown in the table, inflation for housing and medical care outpaced the overall CPI-W increase, while transportation prices rose more slowly.
These disparities suggest that the CPI-W is underestimating inflation from the perspective of retirees, which means the COLA for 2026 may not be sufficient to offset these price increases, potentially causing retirees to lose purchasing power.
The CPI-E: A Better Reflection of Retiree Spending Habits
For a more accurate measure of inflation for seniors, the CPI-E, a subset of the Consumer Price Index that tracks the spending habits of individuals aged 62 and older, provides a clearer picture.
CPI-E inflation for the first quarter of 2025 stood at 2.9%, which was 0.3 percentage points higher than the CPI-W. This further supports the notion that the CPI-W is not fully capturing the inflationary pressures faced by retirees.
What This Means for the 2026 COLA
Since the Social Security Administration won’t finalize the 2026 COLA until the CPI-W data for the third quarter of 2025 is available in October 2025, retirees will have to wait for the final decision.
However, it’s possible that the COLA may still fall short given the inflation trends that are skewed against senior citizens’ primary expenses.
How Retirees Can Prepare
Given the likely gap between actual inflation and the expected COLA for 2026, retirees can take proactive steps now to manage their expenses and ensure they’re better prepared for the financial pressures ahead.
The $22,924 Social Security Bonus: A Hidden Opportunity
Many retirees are unaware of the potential to boost their Social Security benefits through strategic planning. A few lesser-known tactics could add as much as $22,924 to their annual benefits, providing a significant financial cushion.
By learning how to maximize their Social Security benefits, retirees could secure a more comfortable retirement and avoid the negative impacts of insufficient COLA adjustments.
While the 2026 COLA increase of 2.3% may provide some relief for Social Security beneficiaries, the inflation trends suggest that it may not be enough to maintain purchasing power, particularly for retirees who face rising costs in housing and healthcare.
By understanding these dynamics and taking proactive steps to adjust their financial plans, retirees can mitigate the impact of inflation and make the most of their Social Security benefits in the years to come.
FAQs
Why is the CPI-W used to calculate COLA for Social Security?
The CPI-W is based on the spending habits of wage earners and clerical workers, representing a broad cross-section of the working population. While it’s not a perfect fit for retirees, it’s the index the Social Security Administration uses to determine COLA.
How can retirees protect their purchasing power if the COLA is too low?
Retirees can take steps like reducing discretionary spending, focusing on more affordable healthcare options, and seeking additional income through Social Security maximization strategies.
When will the 2026 COLA be finalized?
The 2026 COLA will be finalized in October 2025 after the third-quarter CPI-W data is released.